Friday, October 27, 2006

Weak GDP Figure Means Rate Hikes Are Likely Over

There is no longer any doubt about slowing economic growth. Today's advance estimate of 1.6% real GDP growth for the third quarter is well under the 2.1% consensus estimate. It is also much lower than the 2.6% figure recorded for the second quarter.

The advance estimate is the most inaccurate because it is derived from incomplete data. Most likely, the figure will be revised. Yet the 1.6% growth figure provides no comfort. Many economists were warning about slowing growth, but few foresaw growth slowing this much.

Surprisingly, the consumer is holding up. Real personal consumption expenditures expanded 3.1%, contributing 2.13 points to GDP growth. But real residential fixed investments plummeted 17.4%, subtracting 1.12 points from GDP growth. Net exports subtracted 0.58 points from GDP growth.

Perhaps the best news in the report is the price index for gross domestic purchases. It was up just 2% as compared to the second quarter's gain of 4%. This means the Fed can worry a little less about inflation.

The recent rally in stocks was largely based on a bet that GDP would keep growing at 2-2.5%. Now we know that growth is slowing more than most investors had been expecting. We are also getting signals that the housing market is more troubled than many thought. Calls are rising for the Fed to start easing. Perhaps it's a good time to take some cash off the table.